Published on: Feb 5, 2019 1:17:00 PM
Simply put; liquidity is how easily you can sell an asset for cash. Market liquidity applies to how easy it is to sell an investment — how big and constant a market there is for it.
High market liquidity means that there is a high supply and a high demand for an asset, like a share or ETF, and that there will always be sellers and buyers for it.
In a liquid market it is easy to execute a trade quickly because there are numerous buyers and sellers. Apart from being accessible and generally easier to trade, liquid markets are also characterised by more stable prices and higher levels of efficiency.
Illiquid assets cannot be easily bought or sold, due to a lack of willing investors or speculators. Some small-cap stocks are likely to have less liquidity when compared to equities with larger market caps.
If a market is illiquid, frequent and significant price movements can occur because the supply and demand of the traded security (share or ETF) is low.
At EasyEquities our risk team actively measures liquidity as it is one of the variables that is used to determine our online transaction limits. So, if you notice that a specific stock that you are trying to trade online presents a small limit, it is most likely because the stock is very illiquid on the underlying market.
Liquidity may also impact how many shares you are able to buy in a specific company on EasyEquities. You can read more about that here.
Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an employee of EasyEquities an authorised FSP (FSP no 22588) as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.
